Why The Fitch Downgrade Should Be A Wake-Up Call To Washington — Even If It’s Wrong

How concerned should policymakers and their constituents be about Fitch Ratings Agency’s decision to downgrade the United States credit rating from AAA to AA+ last week? The White House brushed it off, saying Fitch “defies reality” to downgrade U.S. credit at a time when the country is experiencing “the strongest recovery of any major economy in the world.” Meanwhile, leading Republicans say it’s a “a wake-up call to get our fiscal house in order before it’s too late.” The truth is: they’re both right.

On the fundamentals, this downgrade is perplexing because the federal government is no more likely to miss a bond payment today than it has been for the past decade. As the world’s largest economy and one that borrows in its own currency, there is little doubt the U.S. government has a greater ability to pay back its debts than any other entity on Earth. Both Fitch and Moody’s Analytics reaffirmed the AAA credit rating in 2011 even when formerly unprecedented debt-limit brinkmanship caused S&P to issue the first-ever downgrade of U.S. credit. Little has changed since then from a financial perspective — if anything, the U.S. economy is far stronger than it was 12 years ago, both in absolute terms and relative to other advanced economies.